I am grading essays and papers on currency crises (circa 1999-2002) and financial crises (the last one) and basically all those kinds of crises the tend to come from out of control speculation and the government encouraging the wrong kinds of things. This mostly happens because rich people donate to the campaigns of politicians and own newspapers and media outlets. Politicians want to get reelected and get more powerful and more rich. Rich businesses and investors want to get more powerful and rich. It’s kind of the perfect alignment of shared interests based on lust and greed and all the baser instincts. Isn’t it terrible when the facts get in the way? So, they just ignore them or consider them an alternative liberal opinion. It drives me nuts.

Ten years ago this month, Congress enacted the third major tax cut of the George W. Bush administration. Its centerpiece was a huge cut in the tax rate on dividends. Historically, they had been taxed as ordinary income, but the Bush plan, enacted by a Republican Congress, cut that rate to 15 percent. The tax rate on ordinary income went as high as 35 percent.

This initiative originated with the economist R. Glenn Hubbard, who had been chairman of the Council of Economic Advisers when the proposal was sent to Congress. Mr. Hubbard was a strong believer that the double taxation of corporate profits – first at the corporate level and again when paid out as dividends – was a major economic problem.

During the George H.W. Bush administration, Mr. Hubbard had been deputy assistant secretary of the Treasury for tax policy and wrote a Treasury report advocating full integration of the corporate and individual income taxes.

Mr. Hubbard had also spearheaded enactment of big tax cuts in 2001 and 2002 that he said would jump-start the American economy. In an op-ed article in The Washington Post on Nov. 16, 2001, he predicted that the soon-to-be-enacted 2002 tax cut, which President Bush signed on March 9, 2002, would “quickly deliver a boost to move the economy back toward its long-run growth path.”

Mr. Hubbard predicted that it would create 300,000 additional jobs in 2002 and add half a percentage point to the real gross domestic product growth rate.

There is no evidence that the tax cut had any such effect. The unemployment rate remained above 5.7 percent all year, rising to 5.9 percent in November and 6 percent in December. The real G.D.P. growth rate fell each quarter of 2002, and by the fourth quarter growth was at a standstill. Hence the need for yet another big tax cut.

The idea of the 2003 legislation was to raise dividend payouts, thereby bolstering personal income, and raise the prices of common stock, which would improve household balance sheets. As President Bush explained in his signing statement, “This will encourage more companies to pay dividends, which in itself will not only be good for investors but will be a corporate reform measure.” He also said the dividend tax cut would “increase the wealth effect around America and help our markets.”

The Treasury Department issued a fact sheet on July 30 asserting that the decline in dividends had been a cause of the weak stock market and noting that dividend payouts had risen since enactment of the tax cut on May 28.

Subsequent research, however, found that the increase in dividends was a short-term phenomenon and mainly at companies where stock options were a major form of executive compensation. A 2005 Federal Reserve Board study found that the United States stock market did not outperform European stock markets after the dividend cut. Nor did stocks qualifying for lower dividend taxes outperform those, such as real estate investment trusts, that did not qualify for lower dividend taxes. Non-dividend paying stocks slightly outperformed dividend-paying stocks, and many corporations that did pay higher dividends scaled back stock repurchases by a similar amount.

So, this is yet another example where Republican economic policy is totally out of step with outcomes, data, and reality. Yet, they keep repeating that it works the way it doesn’t work just because, remember, the agenda is greed, power, and more wealth to the already greedy, powerful and wealthy. The deal is they get it wrong, got it wrong, and continue to get it wrong but that doesn’t stop them from trying to weasel their way into a narrative that says, hey, this really isn’t wrong. There’s still some validity there and all economists must be liberals like Paul Krugman who are just talking up their philosophical line. Take austerity economics, please. I mean it. Take it and those idiots who push it to hell and leave them there. Still, the very serious people want to take this very seriously even when it is just plain seriously wrong. Take Michael Kinsley, please. He can report from Hell.

There are two possible explanations. First, it might be that I am not just wrong (in saying that the national debt remains a serious problem and we’d be well advised to worry about it) but just so spectacularly and obviously wrong that there is no point in further discussion. Or second, to bring up the national debt at all in such discussions has become politically incorrect. To disagree is not just wrong but offensive. Such views do exist. Racism for example. I just didn’t realize that the national debt was one of them.

Kinsley assumes that it must be the second explanation, and then goes on from there.

I can’t speak for anyone else who pushed back against Kinsley’s column from last week. Speaking for myself, however, I blogged about it because Kinsley was “spectacularly and obviously wrong.” I say this because almost everything I wrote in my response to Kinsley I knew at age 18 after taking Economics 101 in college.

Austerians believe, sincerely, that their path is the quicker one to prosperity in the longer run. This doesn’t mean that they have forgotten the lessons of Keynes and the Great Depression. It means that they remember the lessons of Paul Volcker and the Great Stagflation of the late 1970s. “Stimulus” is strong medicine—an addictive drug—and you don’t give the patient more than you absolutely have to.

This is wrong for three reasons, one pedantic and two substantive. First, to be pedantic, the austerity debate is about the wisdom of using expansionary fiscal policy — i.e., running a significant federal budget deficit — to alleviate downturns. Paul Volcker was the chairman of the Federal Reserve and thereby responsible for setting monetary policy. He had nothing to do with fiscal policy. This is a distinction that I learned in my first few lectures on macroeconomics. So either Kinsley phrased this badly or he’s confused about what this debate is about.

It just keeps coming down to the fact that most journalists and politicians simply do not know what they are talking about when it comes to economics. So, they assume an economist like Paul Krugman has a liberal bias on all things–including the color of the sky and the laws of gravity and demand–and they make the worse assumption that those arguing Republican policy these days must have a valid point when the only point is, yes, you know it … to deliver more wealth, power and influence to themselves and their friends that already have it. Some times a lie really is just a lie.

The background is that Michael Kinsley wrote a particularly bad column last week about “austerity,” a key point of which was based on factually incorrect memories of what went wrong in the 1970s; as you can imagine, this earned him plenty of corrections and dismissals from people who used access to accurate economic and government policy statistics.

Kinsley was quite taken aback by this, apparently, and wrote a follow up to defend himself. Dan Drezner has already pointed out that Kinsley is still relying on the same inaccurate memories that got his first column into trouble, but I actually found a different part of Kinsley II more interesting, in which he thinks he’s caught Paul Krugman in a contradiction.

Kinsley writes:Paul Krugman takes credit for good economic news whenever it happens. On Krugman’s blog site (“The Conscience of a Liberal”) last week were two bits of prose side-by-side. One was an ad for his latest book, End This Depression Now! “How bad have things gotten?” the ad asks rhetorically.” How did we get stuck in what now can only be called a depression?” Right next door is Krugman’s gloat about the recent pretty-good economic news. “So where are the celebrations,” he asks, “now that the debt issue looks, if not solved, at least greatly mitigated?” Greatly mitigated? By what? Certainly not by anyone taking Paul Krugman’s advice. He has been, in his own self-estimate, a lone, ignored voice for reason crying out in an unreasoning universe.

What’s the problem? The linked post by Krugman isn’t a gloat about good economic news! It is, to be sure a gloat; it’s a gloat about deficits…Krugman goes so far as to call lower deficits “progress,” although as I read it he’s really just saying that lower deficits should be counted as progress from the point of view of the deficit scolds.
What’s happening here is that Kinsley is projecting onto Krugman a classic deficit scold mistake; Kinsley is conflating the federal budget deficit with the economy. Krugman isn’t doing that; it’s purely Kinsley’s invention.

It gets, however, to exactly why Kinsley was buried under a large pile of abuse after his first column. Well, in part; the other part, as Krugman notes elsewhere, is “the existence now of a policy blogosphere…which makes bluffing harder.” Say something factually inaccurate these days, and you’re going to get slammed; it seems that some pundits who preceded that development find it hard to get used to it.

I still have no idea why journalists feel they just know everything about economics compared to say, knowing everything about Brownian motion or performing brain surgery. It’s the same with politicians. They just seem to confuse a really complex subject that most people really struggle with in college and never take beyond that with something like a political science class or a journalism class. You don’t even get real economic stuff until you way up there in school. The introductory stuff is like the ABCs and they don’t even seem to grasp that. Anyway, stop confusing getting facts wrong with just another opinion …

Good Morning!!

Over the weekend, I came across this amazing story in The Daily Beast, and I just had to share it: An Auschwitz Survivor Searches for His Twin on Facebook. It’s the story of Menachem Bodner who was just four years old when the Nazi prison camp was liberated. He is now 72 and is now trying to find his twin brother whom he last saw when they were being used as experimental subjects by the infamous Josef Mengele.

It’s most likely that Menachem Bodner last saw his identical twin in 1945, in Dr. Josef Mengele’s gruesome Auschwitz laboratory. He was 4 then and doesn’t remember his time in the notorious death camp. But in the 68 years that have followed, Bodner says he’s “always” been certain he was one of a pair. He just didn’t have any proof until this past year. Now, he’s searching for Jeno, a man who probably looks just like him, and who has a distinctive “A-7734” tattoo on his forearm. And 1 million Facebook users are helping him look.

Mengele, known among prisoners as “the Angel of Death,” was deeply fascinated with twins and used them for research experiments in his macabre Auschwitz lab. Thankfully, Bodner, now 72, has no recollection of the cruelty he most certainly endured while undergoing experiments, though he can remember a sense of paralyzing fear. Unfortunately he also has few impressions of his family’s prewar life in a small town east of Munkacs, Hungary, which is now in the Ukraine. But despite the lack of memories from a war-marred childhood, Bodner says that throughout his life he’s felt a deep connection with his twin—and is positive he’s still alive and out there. But where?

Until last May, Bodner didn’t even know that his own name was once Elias Gottesmann. Now he knows that. And he knows for certain that he has a twin—thanks to the Nazis’ dogged, pathological documentation of their crimes. Ayana KimRon, a professional genealogist in Israel, found the evidence, clearly written in a record put together by the organization Candles, of twins who were “identified as having been liberated at Auschwitz or from a subcamp”:

A-7733, Gottesmann, Elias, 4
A-7734, Gottesmann, Jeno, 4

Incredible! As a result of his search, Bodner has already found family members that he never knew were looking for him, but his dream is to find his brother. What a story it would be if they could be reunited!

I don’t know if you have been following the latest episode in the ongoing battle between Joe Scarborough and Paul Krugman. Scarborough somehow got together with Jeffrey Sachs of The Earth Institute at Columbia University to publish an op-ed in the Washington Post last Friday: Deficits Do Matter. In the op-ed, they attacked Paul Krugman by setting up a series of straw men and then knocking them down–mainly the false claim that Krugman thinks deficits are never a problem for governments. Here’s the introductory paragraph:

Dick Cheney and Paul Krugman have declared from opposite sides of the ideological divide that deficits don’t matter, but they simply have it wrong. Reasonable liberals and conservatives can disagree on what role the federal government should play yet still believe that government should resume paying its way.

It has become part of Keynesian lore in recent years that public debt is essentially free, that we needn’t worry about its buildup and that we should devote all of our attention to short-term concerns since, as John Maynard Keynes wrote, “in the long run, we are all dead.” But that crude interpretation of Keynesian economics is deeply misguided; Keynes himself disagreed with it.

However, if you read Krugman piece that Sachs and Scarborough link to, you’ll see that it doesn’t say what they pretend it does. It says that deficits don’t matter in the short term, but it’s not true that they never matter. Krugman in the quoted column from March 2011:

Right now, deficits don’t matter — a point borne out by all the evidence. But there’s a school of thought — the modern monetary theory people — who say that deficits never matter, as long as you have your own currency.

I wish I could agree with that view — and it’s not a fight I especially want, since the clear and present policy danger is from the deficit peacocks of the right. But for the record, it’s just not right.

The key thing to remember is that current conditions — lots of excess capacity in the economy, and a liquidity trap in which short-term government debt carries a roughly zero interest rate — won’t always prevail. As long as those conditions DO prevail, it doesn’t matter how much the Fed increases the monetary base, and it therefore doesn’t matter how much of the deficit is monetized. But this too shall pass, and when it does, things will be very different.

I guess Sachs and Scarborough assumed their WaPo readers wouldn’t bother to click on the link. Anyway, Mark Thoma wrote an epic takedown of the Sachs-Scarborough op-ed at his Economist’s View blog: Crude Sachsism.

Frankly, I doubt that Scarborough had anything to do with writing the op-ed, and I think it would be really hilarious if someone would ask him to explain it on his show. Why is Scarborough so obsessed with proving Krugman wrong? As for Jeffrey Sachs, he is a follower of Milton Friedman and The Chicago School of Economics who is famous for his failed “Millennium Villages” project and his so-called “shock therapy” in Latin America, Russia, and Eastern Europe. Judge for yourself whether you want to buy into his neoliberal, modified supply-side arguments.

I know I’m kind of a weirdo, but I had a blast reading all this stuff over the weekend, including this post by Ryan Coooper (filling in for Ed Kilgore at The Washington Monthly) questioning why Sachs doesn’t even know what was in the stimulus.

Jeff Sachs has long been known as the celebrity-hobnobbing economist with the seriously flawed “shock therapy” plan for economic development. Lately he’s taken a weird turn in the public debate, coauthoring an op-ed piece with Joe Scarborough of all people, attacking Paul Krugman.

Today he’s back with one of the most bizarre pieces of economic analysis I’ve seen, arguing among other things that 1) the stimulus was too focused on short-term stuff like tax cuts which 2) aren’t effective stimulus anyway (huh?) and 3) should have had much more long-term investment.

I need to read it carefully and follow the links and responses to today–my idea of fun! I guess it’s partly the psychologist in me–I’m fascinated by these human interactions and the verbal battles over important issues of the day.

Continuing the economics theme, Alex Pareene has a great piece at Salon on The competitive advantage of deficit hacks. It’s all about how the media helps the false Village memes and tries to marginalize people like Paul Krugman who actually know something about economics. The gist:

I think a lot about contemporary political debates makes a great deal more sense when you realize that hacks, especially hacks shilling for awful ideas, have a competitive advantage over non-hacks: They do not care if they constantly repeat themselves, even if what they are constantly repeating is wrong.

For a writer or pundit who actually feels some sort of responsibility to inform and/or entertain his or her readers, writing the same damn thing over and over again seems wrong (it is also boring). But bad ideas are constantly being repeated by people who feel absolutely no shame about saying the same things over and over and over again. Indeed, “shamelessness” is in general a defining characteristic of hacks. Also, frequently, people are being paid to repeat the same awful ideas over and over again, and unfortunately usually there’s more money to be made repeating bad ideas than good ones. (Hence: Lanny Davis.)

Arguably, American conservatives are better at sticking to their pet causes in general, as liberals move from fight to fight. Look at how contraception “suddenly” became a matter of national public debate last year, years after liberals thought it a well-settled question. Or look at how long the movement spent trying to roll back the majority of the New Deal, a project that continues to this day!

And on the question of the deficit and the “grand bargain,” Pete Peterson and a few others have spent hundreds of millions of dollars and decades of their lives making the exact same argument, and setting up organizations that pay others to make the exact same argument, until a majority of Beltway centrists internalized the argument and began making it themselves, over and over again. When it comes to centrist pundits, the unsophisticated brainwashing technique that has utterly failed to move the public at large over the last 25 years has worked perfectly. (Because centrist pundits are simple, credulous people, by and large, and also because they will not rely on “entitlements” to survive, when they retire from their very well-compensated jobs.)

Washington has Grand Bargain fever, again. Thanks to the sequestration, Republican government-shrinking mania and Barack Obama’s apparently sincere desire to get some sort of huge long-term debt deal done, the Grand Bargain is looking more possible than at any point since the heady days of the National Commission on Fiscal Responsibility.

For some reason, the options for dealing with sequestration — a self-inflicted made-up austerity crisis — are being purposefully and pointlessly limited to a) spending cuts, either those in sequestration or different ones, or b) spending cuts and tax increases. “Let’s just not do this, everyone” is rarely presented as a viable option. Instead, the single best end result, according to lots of pundits, Democrats and even Republicans, is tthe Mythical Grand Bargain.

This is awful news, for most people. A “grand bargain” is not going to be good. But after Barack Obama had fancy dinners with some Republicans last week, everyone is again hopeful. The president is hopeful. John Boehner is hopeful. David Gergen is probably hopeful. They can all taste the Bargain. Ooh, it’ll be so great when we get that Bargain!

There’s a notable absence of economists on panels in the mainstream media that discuss the fiscal “ramp”. I’m refusing to call it a fiscal cliff because that’s a misnomer. I’m not sure why they won’t put research economists on these panels. Perhaps they think we’re not photogenic or–despite the fact that a lot of us teach–we can’t explain ourselves. There’s an extremely strong consensus in the economics community on the s0-called budget crisis. Dragging out mainstream economists like Paul Krugman and Joseph Stiglitz and labeling them lefties because of their political leanings is rather disingenuous. It stops them from getting on panels where they could actually explain to people what’s what.

The corporate press would rather haul out a few journalists with real background in the field. There’s a difference between asking a journalist, a lawyer, or some self-anointed policy expert a question on economic theory. First, asking an economist to answer a question as an economist means they’ll stick to the theory and the empirical findings. Second, you can actually pull in almost any economist either trained after about 1980 or who has kept up with the dynamic business cycle models, the empirical findings, and theories and you won’t get much disagreement. You wouldn’t know that if you listen to the press, which seems to be made up a few folks with MBAs who have very little understanding of theory, models, or findings.

Deficit hawks tend be either Wall Street types, lawyers, or partisan right wing politicians. The folks that are screaming worst about dropping the tax cuts for the uber rich tend to have the most to lose personally and the least to lose professionally. Study-after-study-after-study shows that tax cuts to the middle, working, and lower classes and to young people tend to create completely different circumstances than they do for older people and the rich. First, there’s more folks in the first group. Second, they tend to spend a lot more of their current income. Third, their savings and investment opportunities are limited, so the assets they use stay in the country. None of this applies to the uber rich who tend to create jobs and wealth overseas these days and work hard to avoid taxes anyway. We’d do well to just simply let go of the idea that increasing the tax rates on the rich will either lead to unemployment, won’t pay down the deficit, or will suppress growth. These are tales of sound and fury signifying nothing but personal greed.

It is true that we are not on a sustainable spending path. This is because of the direct actions of the Bush administration. They lowered tax rates. Ran two huge wars with no tax increases. They oversaw and created two recessions. They created an asset bubble and then popped it. Growth, employment, and the value of taxable assets all decreased because of their actions. We simply have to reverse their trajectory. We have to do some work on Medicare and we need to walk away from the decaying, rotting corpse of Zombie Economics. The Republicans still won’t let that rotting corpse go.

Krugman talks about some of this on his blog in a post called “Squirming Hawks”. Paul Krugman may be a liberal but he’s certainly not going to risk his reputation in the economics community to spout crackpot hypothesis. Look at what happened to Arthur Laffer whose basically been expunged from any serious text, publishing deal, or institution. When you push crackpot hypotheses that do not stand up to empirical testing and you do not give them up and move on, the community of those who base their research on the scientific method will write you off. Those that follow Hayek and Von Mises have been similarly written off. Their ideological hypotheses do not stand up to any empirical testing.

Now, there’s a straightforward argument for why the fiscal cliff is bad but long-term deficit reduction is good — namely, that you really don’t want to cut deficits when the economy is depressed and you’re in a liquidity trap, so that monetary expansion can’t offset fiscal contraction. As Keynes said, the boom, not the slump, is the time for austerity. But the deficit hawks can’t make that argument, because they have in fact been arguing for austerity now now now.

So they’re left making a mostly incoherent case: it’s too abrupt (why?), it’s the wrong kind of deficit reduction (???), and then this:

a better approach would be to focus spending cuts on low-priority spending and on changes which can help to encourage growth and generate new revenue through comprehensive tax reform which broadens the base – ideally by enough to also lower tax rates.

Low-priority spending? I think that means spending on poor people and the middle class. And isn’t it amazing how people who claim to be horrified, horrified about deficits can’t stop talking about cutting tax rates?

We are perilously close to trillion-dollar yearly interest payments, 7 percent yields on 10-year U.S. Treasury bonds, 10 percent home mortgage rates and 13 percent rates on car loans. For the good of the country, the parties must come together and not let this happen.

How does he know that we are “perilously close” to this outcome? Not from the markets; not from any kind of economic model. My guess is that Peggy Noonan told him.

Scaring people with large numbers that are not grounded to other large numbers is a mean and terrible thing to do. We have a huge tax base. We have more than enough ability to continue to borrow at low interest rates. We have the ability to print money. We have all kinds of options. We have a huge economy that is showing signs of coming out of a lot of trauma. We should get a double peace dividend shortly. These things point to a very good reason not to be crazy-go-nuts like the Europeans and fall on the austerity sword.

I guess Paul Krugman hasn’t heard about the magic of tax cuts and supply-side economics. Well, Cato-at-Liberty has, and it’s ticked at the CBO because “it assumes higher tax rates generate more money” when making budget projections. That’s right, despite all the evidence against the claim that tax cuts actually increased revenue — it’s a myth that won’t die because people who know better, or ought to, still promote it — we should discredit the CBO for making the claim that higher tax rates would help with the budget problem.

And that’s not all. The CBO should be further discredited because it says the stimulus package helped to ease the recession:

The CBO repeatedly claimed that Obama’s faux stimulus would boost growth. Heck, CBO even claimed Obama’s spending binge was successful after the fact, even though it was followed by record levels of unemployment.

I’ll pass over the “record levels of unemployment’ claim (but note that unemployment peaked at 10.0% in October 2009, but was 10.8% at the end of 1982, at best this is playing games with the word “levels” and ignoring population growth — and if duration is the argument, as Reinhart and Rogoff recently noted, conditional on the type of recession this recovery is actually a bit better than most).

On the main claim about fiscal policy, there’s plenty of emerging evidence supporting the contention that fiscal policy helped to ease the recession (and remember how much of the stimulus package was tax cuts — it’s amusing to listen to conservatives tell us how useless the tax cuts they fought for as part of the stimulus package turned out to be, especially when in the next breath they argue for more tax cuts). The CBO is dealing in actual evidence, the claims made by Cato-at-Liberty are backed by nothing more than the Republican noise machine that is so good at misleading followers.

Republicans just can’t help themselves from attacking anyone and anything that is inconvenient to their goals, and actual evidence has little to do with it. Apparently, they learned nothing from the election. This is part of a larger effort to discredit the CBO because it doesn’t agree with Republican views on the magic of tax cuts, and for other results the non-partisan agency has come up with that Republicans don’t want to hear (so they basically cover their ears and ignore them).

Sen. Patty Murray (D-Wash.) on Sunday said Democrats were prepared to allow the expiration of all George W. Bush-era tax rates if Republican lawmakers objected to raising taxes on the wealthiest.

“We can’t accept an unfair deal that piles on the middle class and tell them they have to support it. We have to make sure that the wealthiest Americans pay their fair share,” said Murray on ABC”s “This Week.”

Murray said one option would be to let the lower rates expire across-the-board and then return to the table next year with new talks on a tax-cut package.

“So if the Republicans will not agree with that, we will reach a point at the end of this year where all the tax cuts expire and we’ll start over next year. And whatever we do will be a tax cut for whatever package we put together. That may be the way to get past this,” said Murray.

The Washington senator is likely to become chairwoman of the Senate Budget Committee and previously served on the congressional “supercommitee,” which failed to finalize a deficit-reduction plan, which may trigger sequestration cuts in January 2013.

In particular, the CBO gave its most detailed look at how the expiration of the Bush-era tax cuts would affect the economy. Apparently, it would do little harm, the numbers show.

Just like the damn things did little good for the economy and most of us, letting them die would do little harm. I hope the Dems just hold to the facts and that the election has given them some resolve to do the people’s business.

As the Wall Street Journal noted, Krueger’s scholarship suggests he will “likely provide a voice inside the administration for more-aggressive government action to bring down unemployment and, particularly, to address long-term joblessness.”

If his name sounds familiar, it’s because Krueger’s academic work has frequently played a valuable role in the political discourse. When congressional Republicans blatantly lied about the costs of a cap-and-trade plan, it was Krueger who set the record straight. When conservatives said in 2009 that slashing the minimum wage would boost the economy, Krueger explained why the opposite is true.

The economist also brings relevant experience to the table.

I’m hoping this finally brings the correct policy priorities and prescriptions to the table. We’ve had nearly three years of confused messages and results and the economy is clearly the worse for it. There’s an article up at The Guardian by economist Dean Baker that pretty much sums up all of my economic posts for the past few years. Obama never seemed to understand that high unemployment is a problem and never instituted any kind of policy to target the problem directly. He says he gets it now, but I’d just like to remind every one that he said he got it after the election that delivered the House of Representatives to the Tea Party terrorists and still has shown no sign that he understands that people expect bold fiscal policy in the face of low economic growth. All we keep getting is tax breaks for rich people and opposites day fiscal policy.

But ridicule is appropriate. He and we knew all along how many people were out of work. The employment numbers told us the size of the hole and the desperate need for government action.

This sort of ridiculous comment, and President Obama’s weak response to the recession over the first two and a half years of his presidency, explains the tidal wave of scepticism facing his widely hyped upcoming speech on jobs after the Labor Day weekend. The list of remedies leaked ahead of time does little to inspire hope.

At the top of the list of job-creating measures is extending the 2 percentage-point reduction in the social security payroll tax. This provides no boost to the economy, since it just keeps in place a tax cut that was already there, but if the cut is allowed to end at the start of 2012, it will be a drag on growth.

As it stands, the social security programme is being fully reimbursed for the lost tax revenue, but there is always the possibility that Republicans will use this as a basis for attacking the programme. Given President Obama’s willingness to support cuts to social security, it is understandable that this part of his jobs agenda doesn’t generate much enthusiasm.

The overall increase in non-market work implies that household consumption among the unemployed fell less than market income, but it’s hard to put a dollar value on the unpaid work. When people make a voluntary decision to substitute time for money, we can infer something about the relative value they place on it.

But most unemployment is involuntary, and some unpaid work probably represents an effort to stay busy more than a significant contribution to household living standards.

The authors emphasize the relatively large impact of unemployment on unpaid work, in part because this is a new finding, and in part because it counters the wrong impression that, as Professor Hurst put it, the Great Recession was a Great Vacation.

But it is also important to note that most of the unemployed can’t allocate more of the free time they gain to productive uses, even if they want to. They lack the capital, land, tools and skills needed to flexibly shift from wage employment to production for their own use. Even when they can make a partial shift, their productivity is likely to be lower in unpaid work than paid work.

That’s why involuntary unemployment represents such a waste of human capabilities and loss of productive output for the economy as a whole.

His most well known research is on the minimum wage and immigration, The work is somewhat controversial in that the results show small negative effects from raising the minimum wage and from increasing immigration. In my view that is a sign of an economist who is willing to let the evidence do the talking, and that is a good trait to have in this job.

Krueger’s been working at the Treasury so maybe that will give him access that many of the other Obama economic advisers seemed without. Time is running out for policy to help the unemployed in any meaningful way. I say this because as we get closer to the election, it will make the Republicans more surly and less likely to do anything to help a Democratic administration. They’ve already been rewarded for hostage-taking behavior. Then, there’s the policy lags. Things like infrastructure banks take a lot of time to set up. Ideas like patent reform are laughable as job creation tools. I have no idea why the Obama administration won’t embrace things that worked in the past, but that doesn’t appear to be their MO. They seemed to get their jobs mojo from reheating failed Republican canards and presenting them as the higher, middle ground. I continue to be discouraged.

The self-appointed harbingers are not tied to any particular church — they claim organized religion has been corrupted by the devil — but rather to Internet- and radio-based ministries. And their lone mission is to tell anyone and everyone that the end of days is May 21. That’s when, they insist, God’s true believers will be lifted into heaven and saved, during a biblical event widely referred to as the Rapture.

The finer points of Christian eschatology have long been the subject of dispute (not to mention the inspiration for movies and books, like the blockbuster “Left Behind” series). Though mainstream churches reject the the notion that doomsday can be predicted by any man, fringe scholars continue to work feverishly pinpointing the moment of the final, divine revelation. And one such man — 89-year-old radio host Harold Camping — has been at the game for decades.

In the early ’90s, Camping published a book titled “1994?,” which claimed judgment day would arrive in September of that year. When confronted with such a staggering anticlimax — the world, after all, kept on spinning — Camping chose not to be discouraged, but to learn from his mistakes. (He hadn’t considered the Book of Jeremiah, he says.) A civil engineer by trade, Camping went back to the drawing board and continued to crunch the numbers, before arriving at the adamant determination that Rapture would come on May 21, 2011. He began to spread the word through his broadcasting network, Family Radio, in 2009, and quickly built up a fervid following.

1978 In an address to College Republicans before he was elected to the House, Gingrich says: “I think one of the great problems we have in the Republican party is that we don’t encourage you to be nasty. We encourage you to be neat, obedient, and loyal and faithful and all those Boy Scout words.” He added, “Richard Nixon…Gerald Ford…They have done a terrible job, a pathetic job. In my lifetime, in my lifetime—I was born in 1943—we have not had a competent national Republican leader. Not ever.”

1980 On the House floor, Gingrich states, “The reality is that this country is in greater danger than at any time since 1939.”

1980Gingrich says: “We need a military four times the size of our present defense system.” (See 1984.)

1983 A major milestone: Gingrich cites former British Prime Minister Neville Chamberlain on the House floor: “If in fact we are to follow the Chamberlain liberal Democratic line of withdrawal from the planet,” he explains, “we would truly have tyranny everywhere, and we in America could experience the joys of Soviet-style brutality and murdering of women and children.”

What is it that Republicans put in their formula that turns out people like this? Newt was on Meet the Press yesterday where he mouthed off on a number of subject’s including Paul Ryan’s Medicare pogrome. This is the National Review’s take so read with caution.

Newt Gingrich’s appearance on “Meet the Press” today could leave some wondering which party’s nomination he is running for. The former speaker had some harsh words for Paul Ryan’s (and by extension, nearly every House Republican’s) plan to reform Medicare, calling it “radical.”

“I don’t think right-wing social engineering is any more desirable than left-wing social engineering,” he said when asked about Ryan’s plan to transition to a “premium support” model for Medicare. “I don’t think imposing radical change from the right or the left is a very good way for a free society to operate.”

As far as an alternative, Gingrich trotted out the same appeal employed by Obama/Reid/Pelosi — for a “national conversation” on how to “improve” Medicare, and promised to eliminate ‘waste, fraud and abuse,’ etc.

“I think what you want to have is a system where people voluntarily migrate to better outcomes, better solutions, better options,” Gingrich said. Ryan’s plan was simply “too big a jump.”

He even went so far as to compare it the Obama health-care plan.”I’m against Obamacare, which is imposing radical change, and I would be against a conservative imposing radical change.”

I have to say that having Trump, Gingrich, Santorum and Paul all debating each other on one stage would probably be highly entertaining. They could have a contest for who would make the craziest old uncle.

In a heavily-anticipated response to Sen. Michael Bennet, D-Colo., who asked Geithner to document the economic and fiscal impacts of failing to lift the statutory debt limit, the Treasury secretary detailed a chain reaction that would cripple the economy, costing jobs and income.

“A default would inflict catastrophic far-reaching damage on our nation’s economy, significantly reducing growth and increasing unemployment,” said Geithner in the letter to Bennet which was dated May 13. “Even a short-term default could cause irrevocable damage to the economy.”

Geithner has imposed an August deadline for Congress to lift the $14.3 trillion debt ceiling, but lawmakers are still negotiating over Republican demands to tie the move to spending cuts. And a portion of the GOP still remains skeptical about the need to act by the deadline at all, arguing that the consequences have been overstates.

Economist Mark Thoma has a better explanation of how the refusal to increase the debt ceiling would impact the economy on CBSMoney Watch. This explanation is much more precise.

If politicians fail to reach a deal to increase the debt ceiling, there would be a large fall in federal spending. The decline in federal purchases of private sector goods and services would reduce aggregate demand, and this could slow or even reverse the recovery (it could also threaten the delivery of critical services that some people depend upon). In addition, the failure to pay wages to federal workers would disrupt household finances and cause a further decline in demand, as would the failure of the government to pay its bills for the goods and services it has already purchased from the private sector (and it could even threaten some households and businesses with bankruptcy should the problem persist). There may be some room for the Treasury to use accounting tricks to avoid the worst problems, at least for a time, but it is not at all clear how well this would work to insulate the economy from problems and eventually this strategy will come to an end.

That’s potentially bad enough, but it’s far from the end of the problems that could occur. Failure to raise the debt ceiling could also undermine faith in the safety of US Treasury bills. If we default on bond payments, or appear willing to do so even if it doesn’t actually occur and investors lose faith in US Treasury Bills, they will begin demanding higher interest rates to cover the increased perception of risk. This could be very costly. We depend upon the rest of the world to finance our debt at extremely low interest rates. If the willingness of other countries to do this diminishes, then the cost of financing our debt would rise substantially. And that’s not all. In addition to increased debt servicing costs, an increase in interest rates would also choke off business investment potentially lowering economic growth, and the consumption of durable goods by households would fall as well. Rising interest rates would also be bad for the housing recovery (such as it is). Thus, failure to reach an agreement could be very costly.

The Economist‘s Blog on American Politics: Democracy in America has an interesting post right now on ‘The Road to Plutocracy’. It’s an interesting read with a lot of quotes from other pundits.

THE word “plutocracy” is in the air these days. Some say the era of the de facto rule of the mighty top 10%, or top 1%, or whatever insidious sliver of the income distribution is thought to constitute the moneyed power elite, is upon us, or nearly so. I’m not so sure. I am sold on the proposition that there’s something deeply whacked about the American financial system, and that whatever that’s whacked about it is significantly responsible for the top 1% pulling so far away from the rest of the income distribution. This needs to be fixed, whatever its other consequences. It’s not clear to me, however, what exactly is whacked. I don’t know whether to sign up for Tyler Cowen’s “going short on volatility” story, Daron Acemoglu’s “financial-sector lobbying and campaign contributions ‘bought’ an enriching (and destabilising) regulatory structure” story, or some other story. No doubt the truth is in some subtle combination of stories. In any case, accounts such as Mr Acemoglu’s, according to which big players in certain sectors over time manage to rig the regulatory climate to their advantage, are quite compelling for reasons both theoretical and empirical

It drives economist Bruce Bartlett crazy every time he hears another bazillionaire announce he’s in favor of paying higher taxes. Most recently it was Mark Zuckerberg who got Bartlett’s blood boiling when the Facebook founder declared himself “cool” with paying more in federal taxes, joining such tycoons as Bill Gates, Warren Buffett, Ted Turner, and even a stray hedge-fund manager or two.

Bartlett, a former member of the Reagan White House, isn’t against the wealthy paying higher taxes. He’s that rare conservative who thinks higher taxes need to be part of the deficit debate. His beef? It’s a hollow gesture to say the federal government should raise the tax rate on the country’s top wage earners when the likes of Zuckerberg have most of their wealth tied up in stock. Many of the super-rich see virtually all their income as capital gains, and capital gains are taxed at a much lower rate—15 percent—than ordinary income. When Warren Buffett talks about paying a lower tax rate than his secretary, that’s because she sees most of her pay through a paycheck, while the bulk of his compensation comes in the form of capital gains and dividends. In 2006, for instance, Buffett paid 17.7 percent in taxes on the $46 million he booked that year, while his secretary lost 30 percent of her $60,000 salary to the government.

“It’s easy to say ‘Raise taxes’ when you know you’re not going to have to pay those taxes,” Bartlett says. “What I don’t hear is ‘Let’s raise the capital-gains tax.’” Instead the focus has been on the federal tax rate paid by those with an annual income of $250,000 or more—the top 3 percent of earners. Bartlett argues that while raising taxes on the country’s richest individuals would go a long way in easing the debt crisis, it makes no sense to treat the professional making a few hundred thousand dollars a year the same as the Richie Rich set. Maybe it’s hard to muster sympathy for an executive pulling down $1 million a year. But ours is a tax system where a person in the top tax bracket (those earning more than $374,000 in 2010) pays a tax rate of 35 percent on the upper portions of his or her income (37.9 percent if you include Medicare), whereas a hedge-fund manager or mogul earning 10 or 100 times that amount pays less than half that tax rate.

Well, now I’m thinking we’re all just so f’ked that I might as well stop while I’m ahead. What’s on your reading and blogging list today?

The Roosevelt Institute held a Future of the Federal Reserve Event. Here’s video via RortyBomb of Joseph Stiglitz discussing QE2 among other Fed issues. I mentioned something yesterday down thread about the effectiveness of transmission of monetary policy through the traditional interest rate channel into the real economy and Stiglitz has a fairly succinct comment on that. There is some debate on how much the Fed can actually do much at this point–with zero bound interest rates–to get at unemployment and even the inflation coming from higher oil and food prices. We know it can happen, it’s just we don’t have empirical evidence under similar situations–other than from Japan–to know the degree to which stuff can happen right now. So it could be an infinitesimally positive effect even thought it’s a positive effect.

There’s been some discussion of this on economists’ blogs since the Bernanke Presser a few days ago. Mark Thoma tweeted this critique of both him and Brad Delong on the Bernanke Presser from a monetarist’s site from blogger economist Stephen Williamson. My first masters was in Monetary Economics so I’m well-steeped in monetarist theory.

In standard form, Mark Thoma’s heartgoes out to the unemployed, as mine does. However, Mark is much more certain than I am that the Fed can actually help these people out. Here is what Mark would have asked Ben about, if he could:

The main question I wanted to hear Bernanke answer is, given that inflation is expected to remain low, why isn’t the Fed doing more to help with the employment problem? Why not a third round of quantitative easing?

And:

In retrospect, more aggressive action by the Fed was warranted in every instance. Perhaps this time is different — I sure hope so — but the recovery has been far too slow to be tolerable. Green shoots require more than hope, they require the nourishment, and with fiscal policy out of the picture it’s up to the Fed to provide it.

Well, the answer to the question: “Why not a third round of quantitative easing?” should be: “Because it does not do anything.” (see here). In retrospect, the Fed could not have done any more than it did, even if you think that sticky wages and prices matter in a big way. Mark may think that the level of employment is intolerable, but the Fed has to tolerate it in the same way I have to tolerate the soggy weather outside.

I wanted to put this up before I linked to Krugman’s Op-Ed today which argues that Bernanke may be unduly influenced by inflationistas and Ron Paul, of all people called “The Intimidated Fed” and that he can do more. Because, I’m not so sure the FED can do much more or if it’s Ron Paul that’s the dragon needing slaying. First, I think it more like that Bernanke is being influenced by two Fed Presidents sitting on the Board of Governors right now than by Ron Paul. But, I’m not a DC or FED insider so it’s pure speculation on my part.

Some background: The Fed normally takes primary responsibility for short-term economic management, using its influence over interest rates to cool the economy when it’s running too hot, which raises the threat of inflation, and to heat it up when it’s running too cold, leading to high unemployment. And the Fed has more or less explicitly indicated what it considers a Goldilocks outcome, neither too hot nor too cold: inflation at 2 percent or a bit lower, unemployment at 5 percent or a bit higher.

But Goldilocks has left the building, and shows no sign of returning soon. The Fed’s latest forecasts, unveiled at that press conference, show low inflation and high unemployment for the foreseeable future.

True, the Fed expects inflation this year to run a bit above target, but Mr. Bernanke declared (and I agree) that we’re looking at a temporary bulge from higher raw material prices; measures of underlying inflation remain well below target, and the forecast sees inflation falling sharply next year and remaining low at least through 2013.

Meanwhile, as I’ve already pointed out, unemployment — although down from its 2009 peak — remains devastatingly high. And the Fed expects only slow improvement, with unemployment at the end of 2013 expected to still be around 7 percent.

It all adds up to a clear case for more action. Yet Mr. Bernanke indicated that he has done all he’s likely to do. Why?

Second, I’m not sure Bernanke (i.e. The FED) is in a very strong position to do much that can influence the real economy right now. The QE stuff really only shifts the FED portfolio around between long and short term debt which can influence yield curves, but, at the zero bound, there’s still a limited impact on real interest rates. You really can’t go lower than zero in nominal terms. Also, the FED’s bought all this crap from every one from Belgian cities to AIG to give them more liquidity and for the most part, that money’s not channeling back into the US economy in the forms of loans. Monetary policy is never very effective when an economy is in a liquidity trap (extremely low interest rates) and its transmission channel–the way the policy gets to the real economy where GDP lurks–morphs during various economic conditions. We’re not seeing anything resembling 20th century economic conditions.

There are three economists that I read almost every day because I share a lot in common with their value system and their approach to the subject area. That would be Brad DeLong, Paul Krugman, and Mark Thoma. The three are probably the most visible group of liberal economists on the web with the exception of Joseph Stiglitz. All three of them just don’t seem to get why President Obama does what he does given that he said what he said during the election.

Now I admit to being a relative newcomer to academia compared to these three. I’m old and will never garner the prestige they’ve achieved. I spent most of my career in financial institutions and the FED so maybe that’s where the difference comes. I don’t know. But all three of them were on the same track today and the centralized blog theme began on Thoma’s Economist’s View where the topic germinated.

Is giving some one an overly generous portion of the benefit of the doubt something that liberals academics do? I’m beginning to wonder. All this year, the troika appeared to be baffled by the continuing not democratic, not progressive/liberal, and not wise economic policy coming out of the District. Did they listen to the same presidential primary debates that I listened to? Did they watch the appointments of folks like Austin Goolsbee and just miss something? Is it just me?

I find it incredible and disturbing that on the eve of the recent election in which Democrats got trounced, the administration was still trying to figure out if the unemployment problem is structural or cyclical.

Okay, so now we come full circle as Paul Krugman also responds to Thoma with his NYT blog and this title: Lacking All Conviction.

“Now”, I thought as I braced for the read, “we might be getting a little closer to the true source of this ‘communication’ or ‘message’ problem.” But, Krugman’s take on the meeting was concern that POTUS is just getting bad advice. I’m going to bold Krugman’s relevant assertion.

What I want to know is, who was arguing for structural? I find it hard to think of anyone I know in the administration’s economic team who would make that case, who would deny that the bulk of the rise in unemployment since 2007 is cyclical. And as I and others have been trying to point out, none of the signatures of structural unemployment are visible: there are no large groups of workers with rising wages, there are no large parts of the labor force at full employment, there are no full-employment states aside from Nebraska and the Dakotas, inflation is falling, not rising.

More generally, I can’t think of any Democratic-leaning economists who think the problem is largely structural.

Yet someone who has Obama’s ear must think otherwise.

No wonder we’re in such trouble. Obama must gravitate instinctively to people who give him bad economic advice, and who almost surely don’t share the values he was elected to promote. That’s what I’d call a structural problem.

Okay, there are two prominent Noble Prize winners that I’ve mentioned in this thread. Krugman is one and Stiglitz the other. Any truly Democratic President seeking a Roosevelt/Kennedy Style economic program would call on Stiglitz in a minute’s notice. Krugman’s the obvious choice for trade and international economics under similar policy goals. There is a rich legacy of Paul Samuelson acolytes out there. Heck, Samuelson only died a year ago, so he was even available for some time; especially during the historic ‘transition’ presidency when we even got that new fangled seal. Samuelson even went to the University of Chicago and Harvard. Samuelson was the consummate neoKeynesian. He was the yang to the Milton Friedman yin. He was friggin’ brilliant.

Now, I’m feeling a bit like Inigo Montoya here except that it’s not the word inconceivable that’s confusing me. What’s confusing me is that I keep reading these guys. These guys work with models and data. They also–of course–make assumptions. I think the models are okay, but they keep using the wrong assumptions. After two years, you have to question the assumptions when the data results keep confusing you, guys!!

Let’s start with some fresh assumptions that don’t start with he said this, yet he’s doing this, it must be the message, the adviser, or the communication style. Let’s try, he said what it took to get elected. Now, he’s doing what he believes in. If he was all that interested in being the next FDR, at least one of you and Joseph Stiglitz would be on the CEA right now. He’s just not that into you, Keynes, or unemployment unless he thinks it’s going to help in 2012.

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